Transaction ends months of speculation as to future of Premier Foods bread business.

BakingBusiness.com,
1/27/2014

by Eric Schroeder

LOS ANGELES — Global investment firm The Gores Group has reached agreement to pay £30 million ($49.7 million) for a 51% stake in a joint venture that will allow Gores to operate the Hovis bread business of London-based Premier Foods. The bread business is valued at approximately £87.5 million ($144.4 million).

The proposed transaction includes the production, distribution, sales and marketing of Hovis, Mothers Pride, Ormo, Granary and Nimble brands, private label business, business-to-business sales and the flour milling business. Premier Foods will retain the McDougall’s brand for use in retail and certain food service sales of flour and bread mixes and will enter into a licensing arrangement with the joint venture for the use of the Hovis brand for similar retail and business-to-business sales of flour and bread mixes.

In addition, with the exception of the Charnwood Foods facility in Leicester and a flour mill in Andover, the company’s entire operational bakery and milling estate, associated distribution network and assets will be transferred to the joint venture as part of the deal, including the current head office site of the bread business in High Wycombe. All baking, milling and associated head office employees are consequently expected to transfer to the new venture following an appropriate consultation process.

Premier Foods also has agreed to enter into a long-term mutual supply agreement with the joint venture for flour.

Under terms of the agreement, £15 million of the £30 million that Gores is paying to operate the business will be deferred and contingent on future business performance. The two companies also have agreed to invest a combined £45 million in the business in proportion to their respective holding in the form of loan notes, of which £32 million will be provided on completion of the transaction.

“This investment, together with external financing and cash flow from the business, will be used to fund the joint venture’s plan to invest approximately £200 million in the business over the next five years to improve its operational infrastructure and reinvigorate the Hovis brand,” Premier Foods said. “It is expected that the joint venture will also be supported by a stand-alone credit facility for its ongoing working capital requirements with effect from the completion of the transaction. Under certain circumstances, Premier Foods can be called upon to provide up to £10 million of this line. The third party finance will be non-recourse to the company.”

Premier Foods said it intends to use approximately £28 million of the proceeds to provide short-term cash inflow for its grocery business. Specifically, Premier said it intends to use the funds to improve capacity in the cake business, including the investment of approximately £20 million in a new Snack Pack cake slice line at the company’s manufacturing site in Carlton, Barnsley.

“This is exciting news for the bread business and a great deal for Premier Foods,” said Gavin Darby, chief executive officer of Premier Foods. “We can now focus our attention and resources on developing our category leading grocery brands.

“I’m delighted that we’ve found a strong partner in The Gores Group who will help provide the investment necessary to develop the bread business. This will be good for our customers, our employees and all those connected with the business. A joint venture arrangement also means we will share in the future gains from this investment as the business continues its return to profitable growth, helping us maximize value creation. Both parties are excited by the opportunities this transaction brings. ”

Fernando Goni, managing director of The Gores Group, said the investment firm is excited about the “significant untapped potential” of the Hovis brand and is “confident in the abilities of the talented management team to drive value for all stakeholders.”

“The Gores Group has a rich history of working alongside corporate partners to unlock latent value in divisions that require operational and commercial improvement and, as such, we are convinced that Hovis offers a perfect fit for our unique capabilities,” Mr. Goni said.

Headquartered in Los Angeles, The Gores Group currently has approximately $3.4 billion in assets under management, but none in the food and beverage industry.

The joint venture will be led by Bob Spooner, who will become chief executive officer upon completion. Mr. Spooner is currently managing director of bread and group supply chain director for Premier Foods and was responsible for leading the first stages of the restructuring of the bread business over the past 18 months. He will be a member of the board of directors for the joint venture, which will include five additional directors: two nominated by Premier Foods, two nominated by The Gores Group and an independent chairman to be appointed by the joint venture partners. Mr. Darby and Alastair Murray, chief financial officer of Premier Foods, will be the first directors appointed by Premier Foods to the joint venture board.

To provide a degree of certainty for the new venture, Premier Foods and The Gores Group have agreed not to sell their respective shares in the joint venture for at least three years from completion of the transaction. Following the three-year period, the parties have agreed to customary exit provisions for a joint venture of this nature (including tag-along and drag-along provisions).

In the event the transaction does not close due to a failure by Premier Foods to satisfy the conditions, the company has agreed to pay The Gores Group its reasonable out-of-pocket costs subject to a cap in accordance with the listing rules.

For the year ended Dec. 31, 2013, unaudited results of the business that will comprise the joint venture were as follows: sales of £654.6 million, divisional contribution of £27.8 million, trading profit of £6.3 million and EBITDA of £21.9 million. The gross assets of the business entering the joint venture were £240.6 million as of Dec. 31, 2013.